The U.S. Department of Justice (DOJ) recently announced a new development in its effort to crack down on crimes involving trade fraud, including tariff evasion.
The recently created Market, Government and Consumer Fraud (MGCF) Unit within DOJ’s Criminal Division will focus on investigating and prosecuting crimes involving misclassification and undervaluation, transshipping and relabeling of goods in an effort to obscure their “country of origin” under U.S. import laws. This new effort furthers the Trump administration’s aggressive use of tariff policy and reflects an expectation that companies and individuals who could be adversely affected may try to avoid compliance (particularly foreign manufacturers and their U.S. importers).
In light of this emerging enforcement priority for DOJ, it is important for affected businesses and individuals to understand the administration’s, congressional and even state political priorities on actions the agency may take. Companies with global supply chains should take affirmative steps to enhance compliance with changing U.S. import laws affected by recent administration tariff policy changes. For companies facing competition that incorporate trade fraud and other illegal or unfair practices, now is the time to consider offensive strategies. Those strategies can incorporate government relations advocacy to encourage Congress to investigate or scrutinize possible U.S. trade law violators. They can also include supporting civil and criminal prosecutions as well as advocating for investigations from administrative agencies such as the Office of the U.S. Trade Representative, Department of Commerce and Department of the Treasury.
DOJ’s New Market, Government, and Consumer Fraud Unit
The creation of the MGCF Unit within DOJ can be seen as a part of the larger DOJ reorganization and will include attorneys from both the Civil Division’s Consumer Protection branch and the Criminal Division’s Market Integrity and Major Frauds (MIMF) Unit. This new unit will primarily focus on companies and individuals engaged in illegal conduct related to the undervaluation and/or misclassification of goods with the intent to evade tariffs.
It is clear that DOJ anticipates that the dramatic increases in tariffs on imported goods from many countries will significantly incentivize fraudulent evasion, thus causing the U.S. government to lose revenue. This newly focused enforcement effort is expected to be combined with the ongoing civil work related to international trade and tariff violations currently done by the Civil Division. Because of obvious challenges with pursuing foreign actors, such as those in China, enforcement will likely result in increased scrutiny on U.S.-based companies and individuals who act as importers of foreign-made goods and are believed to be complicit in foreign-led evasion schemes.
DOJ’s Use of the False Claims Act to Target Trade Fraud
Another tool at DOJ’s disposal in its effort to fight trade fraud is the federal False Claims Act (FCA). For more than a century, the FCA has been used by DOJ to target all types of fraud against the government. The law imposes liability for both knowingly submitting false claims for payment to the government and for knowingly avoiding obligations to pay money to the government (“reverse false claims”). In the international trade context with respect to imports, the FCA enables the government to recover three times the underpaid amount plus civil penalties.
Recent enforcement actions and large settlements are evidence of the government’s willingness to use the FCA in response to trade law violations. Just last month, DOJ announced two FCA settlements with U.S. companies related to their importation of goods from China. In the first, two subsidiaries of a multinational manufacturing company agreed to pay $6.8 million to the United States after disclosing that they had misreported certain information concerning imports, which resulted in an underpayment of customs duties. The second settlement involved a U.S. furniture company’s misrepresentation of certain information related to aluminum components imported from China and resulted in a $4.9 million settlement.
DOJ’s Focus Is Consistent with Bipartisan Congressional Support
DOJ’s actions are part of a response to a bipartisan March 2005 letter—written by Chairman John Moolenaar (R-MI) and Ranking Member Raja Krishnamoorthi (D-IL) on the House Select Committee on the Chinese Communist Party—calling on Attorney General Pam Bondi, Secretary of Homeland Security Kristi Noem and U.S. Trade Representative Jamieson Greer to take enforcement action against unlawful Chinese trade practices. Specifically, the letter stated:
The PRC’s systematic abuse of U.S. trade laws and protective mechanisms through transshipment, forced labor, and other illicit trade practices represents a clear and urgent threat to American industry and workers. The Select Committee’s bipartisan investigative and oversight work has exposed many examples of relevant concerns. Given such evidence of systemic fraud, we urge your agencies to strengthen enforcement against the PRC’s unlawful trade practices, including by criminally prosecuting trade criminals, stepping up civil enforcement, and self-initiating a Section 301 investigation into PRC transshipment schemes.
Foreign manufacturers, particularly those with Chinese ownership or significant Chinese origin inputs, as well as their U.S. importers and customers should be alert to the heightened enforcement from multiple U.S. agencies and take steps to ensure their compliance with applicable U.S, laws. On the other hand, U.S. domestic manufacturers or importers reliant on non-Chinese supply chains are increasingly considering congressional scrutiny and increased enforcement as potential opportunities to point out noncompliance from their competitors. This could include taking advantage of a full range of traditional and newer “trade” tools, including strengthened antidumping and countervailing duty rules that include action against “transnational subsidies” provided by China to companies and third-party countries willing to participate in trading activities that violate U.S. trade laws.
Chinese-owned or -controlled manufacturers are also coming up with ways to evade compliance with the Uyghur Forced Labor Prevention Act, which presumes that any Chinese import contains illicit forced labor from China’s Muslim Xinjiang province unless the importer proves by clear and convincing evidence that the import does not contain such illicit forced labor—an incredibly high standard requiring intensive time for supply chain tracing.
Key Takeaways
A range of U.S. businesses, including companies that source and import from China or Southeast Asia in certain supply chains, could face scrutiny as a result of this new DOJ initiative. Indeed, we will likely see an increase in both civil and criminal investigations, a prospect that should cause companies affected by tariffs to consider the following best practices to avoid or withstand DOJ scrutiny.
- Evaluate and strengthen existing compliance programs in light of current regulatory expectations, particularly U.S. import-related laws, regulations and practices. Be wary of competitors who may use offensive strategies that could adversely impact a business’ overall profitability and operations.
- Review supply chain partners and contractual relationships for legal compliance issues, including “ultimate beneficial ownership” (UBO—particularly since Chinese companies have long been advised by their Chinese advisers to use opaque and often complex corporate holding structures that rely on “tax haven” offshore jurisdictions to hide ownership as well as evade Chinese taxes on their hard currency profits. Such review should include possible engagement of specialist third-party investigative resources under a “Kovel” arrangement to maintain attorney-client privilege with non-lawyer experts.
- Implement relevant training requirements for all relevant employees and agents (including crisis training) with regular updates to reflect lessons learned from publicized enforcement actions.
- Create and maintain robust internal reporting systems to allow for meaningful whistleblower disclosures.
- Adopt effective auditing procedures to test internal policies and controls.
- Utilize legal counsel to review compliance policies and conduct internal investigations when necessary.
With dramatically higher tariffs at the center of the Trump administration’s foreign trade strategy, aggressive enforcement action by DOJ is a given. The recent creation of the MGCF Unit and use of the FCA are clear indications of DOJ’s enforcement agenda going forward. This agenda greatly enhances the potential risk to companies and individuals who may be adversely affected by the administration’s tariffs strategy. As with other types of risk, effective compliance is the key to effective mitigation.
In situations where unfairly traded goods and inputs are having an adverse effect on business, the new priorities provide an opportunity to consider using a coordinated strategy that combines advocacy before the Trump administration and Congress along with an offensive legal strategy that supports civil action and criminal investigation and prosecution using a combination of traditional international trade laws as well as newer legal tools.
